Glossary
Adjustable-Rate Mortgage (ARM) – Type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. With an adjustable-rate mortgage, the initial interest rate is fixed for a period of time. After this initial period, the interest rate resets periodically, at yearly or even monthly intervals.
ADP Research Institute – ADP generates data-driven discoveries about the world of work and derives economic indicators from these discoveries. Its two primary areas of focus are labor market trends, and issues related to people and performance at work.
Agency – Mortgage securities whose principal and interest are guaranteed by a U.S. government agency such as Fannie Mae (FNMA) or Freddie Mac (FHLMC).
Alpha – Term used in investing to describe a strategy’s ability to beat the market, or its “edge.” Alpha is thus also often referred to as “excess return” or “abnormal rate of return,” which refers to the idea that markets are efficient, and so there is no way to systematically earn returns that exceed the broad market as a whole.
Alt-A – Classification of mortgages with a risk profile falling between prime and subprime. They can be considered high risk due to provision factors customized by the lender.
Amortization – Used as an accounting technique to periodically lower the book value of a loan or intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.
Asset-Backed Securities (ABS) – Investment securities, such as bonds or notes, that are collateralized by a pool of assets, such as loans, leases, credit card debt, royalties or receivables.
AUD – Australian dollar
Average Life – Length of time the principal of a debt issue is expected to be outstanding. Average life does not take into account interest payments but only principal payments made on a loan or security.
Average Price – Measure of the weighted average price paid for a group of securities calculated by taking the prices and dividing by the number of securities and does not include cash. Average price should not be confused with net asset value (NAV).
B-Piece – When commercial mortgage-backed security loans are pooled together to create commercial mortgage-backed securities (CMBS), these securities vary in credit quality and payment priority. Typically, they are divided into several different tranches, which can be grouped into two broad categories: investment grade and below-investment-grade securities. A-class bondholders are paid first, and “B-piece” bondholders must wait until all A-class bondholders are fully paid before they receive any compensation. Due to their higher risk, however, B-piece CMBS offer investors significantly higher returns when compared to A-class CMBS.
Backwardation – When the current price of an underlying asset is higher than prices trading in the futures market. Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the coming months through the futures market. Traders use backwardation to make a profit by selling short at the current price and buying at the lower futures price.
Bank Loan – Debt financing obligation issued by a bank or similar financial institution to a company.
Basis Points (bps) – Basis points (or basis point (bp)) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% or 0.0001, and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as: 1% change = 100 basis points; 0.01% = 1 basis point.
Bear Flatten – When short-term U.S. Treasury interest rates rise faster than longer-term rates. This convergence is seen as a harbinger of economic contraction.
Bear Steepen – Widening of the yield curve caused by long-term interest rates increasing at a faster rate than short-term rates. A bear steepening is usually suggestive of rising inflationary expectations or a widespread rise in prices throughout the economy.
Below Investment Grade/Non-Investment Grade – Term indicating a security is rated below investment grade (IG). These securities are seen as having higher default risk or being prone to other adverse credit events. They typically pay higher yields than higher-quality bonds in order to make them attractive. They are less likely than IG bonds to pay back 100 cents on the dollar.
Beta – Measure of the volatility – or systematic risk – of a security or portfolio compared to the market as a whole.
Beta Exposure – Beta is the return generated from a portfolio that can be attributed to overall market returns. Beta exposure is equivalent to exposure to systematic risk.
Bid-to-Cover Ratio – Dollar amount of bids received in a U.S. Treasury security auction versus the amount sold. The bid-to-cover ratio is an indicator of the demand for Treasury securities. A high ratio indicates strong demand.
Bid Wanted in Competition (BWIC) – Formal request for bids on a package of securities that is submitted by an institutional investor to a number of securities dealers. The dealers are being invited to submit bids on the listed securities.
BofA Global Fund Manager Survey – Monthly report that canvasses the economic views of approximately 300 institutional, mutual and hedge fund managers around the world.
Bond Ratings – Grades given to bonds that indicate their credit quality as determined by a private independent rating service such as Standard and Poor’s. The firm evaluates a bond issuer’s financial strength, or its ability to pay a bond’s principal and interest in a timely fashion. Ratings are expressed as letters ranging from AAA, which is the highest grade, to D, which is the lowest grade. In limited situations when the rating agency has not issued a formal rating, the rating agency will classify the security as “not rated.”
Book Value – Equal to the cost of carrying an asset on a company’s balance sheet, and firms calculate it netting the asset against its accumulated depreciation. As a result, book value can also be thought of as the net asset value (NAV) of a company, calculated as its total assets minus intangible assets (patents, goodwill) and liabilities. For the initial outlay of an investment, book value might be net or gross of expenses such as trading costs, sales taxes, service charges and so on.
Book Value Per Share (BVPS) – Ratio of equity available to common shareholders divided by the number of outstanding shares. This figure represents the minimum value of a company’s equity and measures the book value of a firm on a per-share basis.
Brent Crude Oil – Major trading classification of sweet light crude oil that serves as a benchmark price for purchases of oil worldwide. Brent is known as a light, sweet oil because it contains 0.24% sulfur, making it “sweet,” and has a low density, making it “light.”
Broadly Syndicated Loan (BSL) – Any loan to an obligor issued as part of a loan facility with an original loan size (including any first and second lien loans in the facility) greater than $250 million.
Build Back Better Act – Social safety net and climate legislation drafted and backed by the Democratic Party that originally proposed more than $1.75 trillion in spending. A “social infrastructure” bill that was originally paired with the Infrastructure Investment and Jobs Act, a “hard infrastructure” bill, which was signed into law Nov. 15, 2021. The Build Back Better Act has undergone revisions and has yet to pass Congress.
Burnout – Period of time during which the prepayment rates of mortgage-backed securities (MBS) slow despite falling interest rates. When the cost of borrowing drops, the mortgage holders underlying the MBS have an incentive to refinance. If they fail to take advantage, it is attributed to burnout.
Capital Expenditures (CapEx) – Funds used by a company to acquire, upgrade and maintain physical assets such as property, plants, buildings, technology or equipment. CapEx is often used to undertake new projects or investments by a company, commonly with the goal of increasing the scope of or adding some economic benefit to operations.
Capitalization Rate – Used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income that the property is expected to generate. It is calculated by dividing net operating income by property asset value and is expressed as a percentage.
Carry – The carry of an asset is the return obtained from holding it (if positive), or the cost of holding it (if negative).
Cash – Refers along with “cash equivalents” to the line item on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately. Cash equivalents include bank accounts and marketable securities, which are debt securities with maturities of less than 90 days. Cash equivalents often do not include equity or stock holdings because they can fluctuate in value.
Cash Flow – Net amount of cash and cash equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flow.
Cash-on-Cash Return – Rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property. Put simply, cash-on-cash return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year. It is considered relatively easy to understand and one of the most important real estate return-on-investment calculations.
Cash-Out Refinancing – Mortgage-refinancing option in which an old mortgage is replaced by a new one with a larger amount than owed on the previously existing loan, helping borrowers use their home mortgage to get some cash.
Collateralized Loan Obligation (CLO) – Single security backed by a pool of debt.
Collateralized Mortgage Obligation (CMO) – Refers to a type of mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment. Organized by maturity and level of risk, CMOs receive cash flows as borrowers repay the mortgages that act as collateral on these securities. In turn, CMOs distribute principal and interest payments to investors based on predetermined rules and agreements.
Combined Loan-to-Value (CLTV) Ratio – Ratio of all secured loans on a property to the value of a property. Lenders use the CLTV ratio to determine a prospective home buyer’s risk of default when more than one loan is used.
Commercial Mortgage-Backed Securities (CMBS) – Securitized loans made on commercial rather than residential properties.
Commodity Trading Advisor (CTA) Fund – Hedge fund that uses a managed futures strategy. It invests in futures contracts and uses a variety of trading strategies. These may include systematic trading and trend following. However, fund managers also can actively manage investments using discretionary strategies. CTA funds offering a managed futures strategy must be registered with the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA).
Compound Annual Growth Rate (CAGR) – Rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.
Comps – Short for “comparable company analysis,” which is a technique used to assign a value to a business based on the valuation metrics of a peer or peers.
Conditional Prepayment Rate (CPR) – Metric (also known as “constant prepayment rate”) that indicates a loan prepayment rate at which the outstanding principal of a pool of loans, such as mortgage backed securities (MBS), is paid off. The higher the CPR, the more prepayments are anticipated and thus the lower the duration of the note. This is called “prepayment risk.”
Conduit Loans – Type of loans, also known as commercial mortgage-backed securities (CMBS) loans, that are commercial real estate loans pooled together with similar commercial mortgages and sold on the secondary market. On the secondary market, conduit loans are divided into tranches based on risk, return and loan maturity.
Connecticut Avenue Services – Credit risk transfer program launched by Fannie Mae in 2013. Notes are issued by a bankruptcy-remote trust.
Contango – Situation where the futures price of a commodity is higher than the spot price. In all futures market scenarios, the futures prices will usually converge toward the spot prices as the contracts approach expiration. Advanced traders can use arbitrage and other strategies to profit from contango.
Convexity – A measure of the curvature, or the degree of the curve, in the relationship between bond prices and bond yields. Convexity demonstrates how the duration of a bond changes as the interest rate changes. Portfolio managers will use convexity as a risk-management tool to measure and manage the portfolio’s exposure to interest rate risk.
Copper – Price of which is regarded as a reliable indicator for turning points in the global economy because of the metal’s use in most sectors of the economy — from homes and factories to electronics and power generation and transmission. Rising copper prices suggest strong demand and a growing global economy while a fall in prices suggests lower demand and a possible economic slowdown.
Copper-Gold Ratio (CGR) – Calculated by dividing the market price of a pound of copper by the market price of an ounce of gold. The ratio number tends to decline in economic contractionary periods as investors move into safe-haven assets such as gold. The ratio number tends to rise in economic expansionary periods as the cost of copper increases as demand for the metal picks up. The metal is used in most sectors of the economy.
Core Plus – Investment management style that permits managers to augment a core base of holdings, within a specified-objective portfolio, with instruments that have greater risk and greater potential return. Funds that utilize this strategy are called core-plus funds. Core-plus funds are typically associated with fixed income funds, adding alternative investments such as high yield (HY), global and emerging markets (EM) debt to a core portfolio of investment grade (IG) bonds.
Correlation – A statistical measurement of the relationship between two variables. Possible correlations range from +1 to -1. A zero correlation indicates no relationship between the variables; -1 indicates a perfect negative correlation; +1 indicates a perfect positive correlation.
Cost of Goods Sold (COGS) – Refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution and sales force costs.
Coupon – A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a year divided by the face value of the bond in question).
Covenant-Lite Loan – A type of financing that is issued with fewer restrictions on the borrower and fewer protections for the lender.
CME Term 3 Month Secured Overnight Financing Rate (SOFR) – Metric compiled by CME Group to provide a forward-looking measurement of three-month SOFR rates based on market expectations implied from leading derivatives markets. SOFR is a benchmark interest rate for U.S. dollar-denominated derivatives and loans that is replacing the London Interbank Offered Rate (LIBOR).
Credit Distribution – Determined from the highest available credit rating from any nationally recognized statistical rating organization (NRSRO, generally S&P, Moody’s and Fitch). DoubleLine chooses to display credit ratings using S&P’s rating convention, although the rating itself might be sourced from another NRSRO.
Credit Enhancement – Method through which a borrower or bond issuer seeks to improve its debt- or creditworthiness by adding protection through financial support against losses on securitized assets.
Credit Quality – Determined from the highest available credit rating from any nationally recognized statistical rating organization (NRSRO, generally S&P, Moody’s or Fitch). DoubleLine chooses to display credit ratings using S&P’s rating convention, although the rating might be sourced from another NRSRO. The rating organization evaluates a bond issuer’s financial strength, meaning its ability to pay a bond’s principal and interest in a timely fashion. Ratings are expressed as letters ranging from AAA, the highest grade, to D, the lowest grade. In situations where the rating organization has not issued a formal rating on a security, the security will be classified as “nonrated.”
Credit Rating – Refers to a quantified assessment of a borrower’s creditworthiness in general terms or with respect to a particular debt or financial obligation. A credit rating can be assigned to any entity that seeks to borrow money: an individual, corporation, state or provincial authority, or sovereign government.
Credit Risk Transfer (CRT) – Pioneered by Freddie Mac in 2013, CRT programs structure mortgage credit risk into securities and (re)insurance offerings, transferring credit risk exposure from U.S taxpayers to private capital.
Current Population Survey – Monthly survey of households conducted by the U.S. Census Bureau for the Bureau of Labor Statistics. It provides a comprehensive body of data on the labor force, employment, unemployment, persons not in the labor force, hours of work, earnings, and other demographics and labor force characteristics.
CUSIP Number – “CUSIP” refers to the Committee on Uniform Securities Identification Procedures that oversees the entire CUSIP system. The CUSIP number is a unique nine-digit identification number assigned to all stocks and registered bonds in the United States and Canada, and it is used to create a concrete distinction among securities that are traded on public markets.
Cyclical-Defensive Equity Ratio – Measures the performance of cyclical and defensive (also called “noncyclical”) stocks. Cyclical stocks are affected by macroeconomic changes and, thus, follow the cycles of an economy. Defensive stocks are generally the opposite of cyclical stocks, which include discretionary companies whose products are considered nonessential.
Cyclically Adjusted Price-to-Earnings (CAPE®) Ratio – This ratio measures valuation by using real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur during different periods of a business cycle. It is also known as the “Shiller P/E ratio” for Yale University Dr. Robert Shiller, who popularized its use.
Debt-to-Income (DTI) Ratio – Personal finance measure that compares an individual’s monthly debt payment to their monthly gross income. Your gross income is your pay before taxes and other deductions are taken out. The DTI ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.
Defeased Security – Security secured by another asset, such as cash, by the debt-issuing firm that can nullify its balance-sheet obligation. Defeasance, in general, is any provision in a contract that voids a bond or loan on a balance sheet when the borrower puts up cash or low-risk bonds capable of covering the debt.
Delta – Ratio that compares the change in the price of an asset, usually marketable securities, to the corresponding change in the price of its derivative. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share, all else being equal.
Depreciation – Reduction in the value of an asset with the passage of time.
Discount Margin – Average expected return of a floating-rate security (typically a bond) that is earned in addition to the index underlying, or reference rate of, the security. The size of the discount margin depends on the price of the floating- or variable-rate security. The return of floating-rate securities changes over time, so the discount margin is an estimate based on the security’s expected pattern between issue and maturity.
Dot Plot – Simple statistical chart that consists of data points plotted as dots on a graph with x- and y-axes. Dot plots are well known as the method that the Federal Reserve uses to convey its benchmark federal funds rate outlook at certain Federal Open Market Committee (FOMC) meetings.
Down Capture – Statistical measure (also known as “down-market capture ratio”) of an investment manager’s overall performance in down markets. It is used to evaluate how well an investment manager performed relative to an index during periods when that index dropped. The ratio is calculated by dividing the manager’s returns by the returns of the index during the down market and multiplying that factor by 100.
Drawdown – Peak-to-trough decline during a specific period for an investment, trading account or fund. A drawdown is usually quoted as the percentage between the peak and the subsequent trough.
Duration – Measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) – Measure of a company’s overall financial performance that is used as an alternative to net income in some circumstances.
Earnings Per Share – Calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability.
EBITDA Margin – Measures a company’s earnings before interest, taxes, depreciation and amortization as a percentage of the company’s total revenue. This margin is used to gauge a company’s financial condition.
Efficient Frontier – Set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.
Embedded Option – A feature of a financial security that lets issuers or holders take specified actions against the other party at some future time.
Empirical Rule – Statistical rule (also referred to as the “three-sigma rule” or “68-95-99.7 rule”) that states that for a normal distribution almost all observed data will fall within three standard deviations (denoted by σ) of the mean or average (denoted by µ). In particular, the empirical rule predicts that 68% of observations falls within the first standard deviation (µ plus or minus σ), 95% within the first two standard deviations (µ plus or minus 2σ), and 99.7% within the first three standard deviations (µ plus or minus 3σ).
Employee Retirement Income Security Act (ERISA) of 1974 – U.S. tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans.
Enhanced Equipment Trust Certificate (EETC) – An equipment trust certificate (ETC) is a debt instrument that allows a company to take possession of and enjoy the use of an asset while paying for it over time. The debt issue is secured by the equipment or physical asset. An EETC is one form of ETC that is issued and managed through special purpose vehicles known as pass-through trusts that allow borrowers to aggregate multiple equipment purchases into one debt security.
Enterprise Value (EV) – Measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company, short- and long-term debt as well as any cash on the company’s balance sheet. EV is a popular metric used to value a company for a potential takeover.
EUR – Euro
EUR/USD – The currency pair EUR/USD is the shortened term for the euro and U.S. dollar pair or cross for the currencies of the European Union and the United States. The currency pair indicates how many dollars (the quote currency) are needed to purchase 1 euro (the base currency).
European Central Bank (ECB) – Responsible for the monetary policy of the European Union (EU) member countries that have adopted the euro as their currency. This region is known as the eurozone and comprises 20 members.
European Commission Consumer Confidence Indicator Eurozone – This measure, published by the European Commission, tracks sentiment among households and/or consumers based on surveys among a random sample of households in the eurozone.
EV/EBITDA Ratio – Popular valuation multiple used in the finance industry to measure the value of a company. It is the most widely used valuation multiple based on enterprise value and is often used in conjunction with, or as an alternative to, the price-to-earnings (P/E) ratio to determine the fair market value of a company.
Excess Return – Return achieved above and beyond the return of a proxy such as a benchmark index.
Exchange-Traded Fund (ETF) – Type of security that involves a collection of securities – such as stocks – that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges, and ETF shares trade throughout the day just like ordinary stocks.
FactSet – FactSet Research Systems provides computer-based financial data and analysis for financial professionals, including investment managers, hedge funds and investment bankers. It consolidates data on global markets, public and private companies, and equity and fixed income portfolios.
Fallen Angel – A bond that was initially given an investment grade rating but has since been reduced to junk-bond status. The downgrade is caused by a deterioration in the financial condition of the issuer.
Fannie Mae (FNMA) – The Federal National Mortgage Association (Fannie Mae) is a government-sponsored enterprise (GSE) chartered by Congress in 1938 during the Depression to stimulate home ownership and provide liquidity to the mortgage market. Its purpose is to help moderate- to low-income borrowers obtain financing for a home.
Fannie Mae Delegated Underwriting and Servicing (DUS) Program – Grants approved lenders the ability to underwrite, close and sell loans on multifamily properties to Fannie Mae without prior Fannie Mae review.
Fannie Mae National Housing Survey – Nationally representative telephone survey polling 1,000 consumers a month about owning and renting a home, home and rental price changes, the economy, household finances and overall consumer confidence. Respondents are asked more than 100 questions, six of which are distilled into a single indicator – the Home Purchase Sentiment Index (HPSI) – designed to provide signals on future housing outcomes.
Fed Funds Futures – Financial contracts that represent the market opinion of where the daily official federal funds rate will be at the time of the contract expiry. The futures contracts are traded on the Chicago Mercantile Exchange and are cash settled on the last business day of every month. Fed funds futures can be traded every month as far out as 36 months.
Federal Family Education Loan Program (FFELP) – System (which was discontinued in 2010) of private student loans that were subsidized and guaranteed by the U.S. government.
Federal Funds Rate – Target interest rate, set by the Federal Reserve at its Federal Open Market Committee (FOMC) meetings, at which commercial banks borrow and lend their excess reserves to each other overnight. The Fed sets a target federal funds rate eight times a year, based on prevailing economic conditions.
Federal Funds Terminal Rate – This rate is what economists call the “natural” or “neutral” interest rate. It is the rate that is consistent with full employment and capacity utilization, and stable prices.
Federal Home Loan Banks – Eleven U.S. government-sponsored banks that provide liquidity to the members of financial institutions to support housing finance and community investment.
Federal Open Market Committee (FOMC) – Branch of the Federal Reserve System that determines the direction of monetary policy specifically by directing open market operations. The FOMC comprises the seven board governors and five (out of 12) Federal Reserve Bank presidents.
FICO Score – This credit score, created by the Fair Isaac Corp., is used by lenders along with other details on a borrower’s credit report to assess credit risk and determine whether to extend credit.
First Lien, Last Out (FILO) – Collateral loan that would be a first-lien loan but for the fact that at any time prior to and/or after an event of default under the related documents, such a collateral loan will be paid after one or more tranches of first-lien loans issued by the obligor have been paid in full in accordance with a specified waterfall or other priority of payments as specified in the related documents, an agreement among lenders or other applicable agreement.
Foreign Direct Investment (FDI) – Investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. However, FDIs are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.
Foreign Exchange (FX) – Foreign exchange (forex or FX) is the trading of one currency for another. For example, one can swap the U.S. dollar for the euro. Foreign exchange transactions can take place on the foreign exchange market, also known as the forex market. There is no centralized location, rather the forex market is an electronic network of banks, brokers, institutions and individual traders (mostly trading through brokers or banks).
Freddie Mac (FHLMC) – The Federal Home Loan Mortgage Corp. (Freddie Mac) is a stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle-income Americans. Freddie Mac, purchases, guarantees and securitizes mortgages to form mortgage-backed securities (MBS).
Freddie Mac Primary Mortgage Market Survey (PMMS) – This weekly national survey tracks the most-popular 30- and 15-year fixed-rate mortgages among a mix of lender types. The survey is compiled Monday through Wednesday and released (as average rates) on Thursday.
Free Cash Flow (FCF) – Cash a company produces through its operations after subtracting any outlays of cash for investment in fixed assets like property, plant and equipment. In other words, FCF is the cash left over after a company has paid its operating expenses and capital expenditures.
G-7 (Group of Seven) – Forum of the seven countries with the world’s largest developed economies whose government leaders meet annually on international economic and monetary issues. The member countries are: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
G-10 (Group of Ten) – The G-10 comprises 11 industrialized nations that meet on an annual basis, or more frequently as needed, to consult each other, debate and cooperate on international financial matters. The member countries are: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.
G-20 (Group of 20) – The G-20 comprises the European Union leadership and 19 countries that look to cooperate on international financial matters. The member countries are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States.
GBP – British pound
GFC – Global Financial Crisis
Gilt – Bond issued by the U.K., India and other countries that used to be in the British commonwealth. Gilts are the equivalent of U.S. Treasury securities in their respective countries. The term “gilt” is often used informally to describe any bond that has a very low risk of default and a correspondingly low rate of return.
Ginnie Mae (GNMA) – The Government National Mortgage Association (Ginnie Mae) is a federal government corporation that guarantees the timely payment of principal and interest on mortgage-backed securities (MBS) issued by approved lenders. Ginnie Mae’s guarantee allows mortgage lenders to obtain a better price for MBS in the capital markets.
Ginnie Mae I – Ginnie Mae I is composed of mortgages that pay principal and interest on the 15th of every month while Ginnie Mae II mortgages do the same on the 20th. Another difference between the two pools is the maturity, with Ginnie Mae I having a maximum of 30 years for single family and 40 years for multifamily; Ginnie Mae II is 30 years max, as it doesn’t include multifamily project or construction loans.
Ginnie Mae Project Loans – Typically fixed-rate Agency loans that have a maturity term of 35 to 40 years and full amortization, and are backed by multifamily, healthcare and rural housing properties.
Ginnie Mae II – This class of pass-through investments is issued by the Government National Mortgage Association (GNMA), known as Ginnie Mae, and draws income from pools of Federation Housing Administration and Department of Veterans Affairs mortgages. Ginnie Mae II securities pay principal and interest on the 20th every month (in contrast to the 15th for Ginnie Mae I) and have a maximum maturity of 30 years.
Global Industry Classification Standard (GICS) – Hierarchical industry classification system, created by Morgan Stanley Capital International and S&P Dow Jones Indices in 1999, comprising four tiers going from broadest to narrowest to classify companies by industry: sectors, industry groups, industries and subindustries. The 11 GICS sectors are: energy, materials, industrials, consumer discretionary, consumer staples, healthcare, financials, information technology, real estate, communication services and utilities.
Goldilocks Economy – The term describes an ideal state for an economic system where there is full employment, economic stability and stable growth. The economy is not expanding or contracting by a large margin.
Government-Sponsored Enterprise (GSE) – Quasi-governmental entity established to enhance the flow of credit to specific sectors of the American economy. Created by acts of Congress, these agencies – although they are privately held – provide public financial services. GSEs help to facilitate borrowing for a variety of individuals, including students, farmers and homeowners.
Gross Domestic Product (GDP) – Market value of all final goods and services produced within a country in a given period. GDP is considered an indicator of a country’s standard of living.
Gross Leverage Ratio – Total cash less total borrowings, divided by the market value of total securities.
Growth Stock – Any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is because the issuers of growth stocks are usually companies that want to reinvest any earnings they accrue in order to accelerate growth in the short term. When investors invest in growth stocks, they anticipate that they will earn money through capital gains when they sell their shares.
High Yield (HY) – Bonds that pay higher interest rates because they have lower credit ratings than investment grade (IG) bonds. HY bonds are more likely to default, so they must pay a higher yield than IG bonds to compensate investors.
Information Ratio – A measurement of portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns. The benchmark used is typically an index that represents the market or a particular sector or industry.
Interest Expense – Cost incurred by an entity for borrowed funds. Interest expense is a nonoperating expense shown on a company’s income statement.
Interest on Excess Reserves (IOER) Rate – Tool by which the Federal Reserve moves the federal funds rate into the target rate set by the Federal Open Market Committee by adjusting the IOER rate.
Interest Only (IO) Strips – Sometimes investment firms or dealers take a debt obligation or pool of obligations – mortgages, Treasuries or other bonds – and after separating their principal and interest portions, sell them as distinct security products, creating what’s known as a strip bond. An IO strip is the part that consists only of the interest portion of the monthly payment. Although IO strips can be created out of any debt-backed security that generates periodic payments, the term is usually associated with mortgage-backed securities.
Investment Grade (IG) – Rating that signifies a municipal or corporate bond presents a relatively low risk of default. Bonds below this designation are considered to have a high risk of default and are commonly referred to as high yield (HY) or “junk bonds.” The higher the bond rating the more likely the bond will return 100 cents on the U.S. dollar.
Job Openings and Labor Turnover Survey (JOLTS) – Conducted by the U.S. Bureau of Labor Statistics, JOLTS involves the monthly collection, processing and dissemination of job openings and labor turnover data. The data, collected from sampled establishments on a voluntary basis, includes employment, job openings, hires, quits, layoffs, discharges and other separations. The number of unfilled jobs – used to calculate the job openings rate – is an important measure of the unmet demand for labor, providing a more complete picture of the U.S. labor market than by looking solely at the unemployment rate.
JPY – Japanese yen
Jumbo Loan – Type of financing, also known as a jumbo mortgage, that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Unlike conventional mortgages, a jumbo loan is not eligible to be purchased, guaranteed or securitized by the government agencies Fannie Mae or Freddie Mac. Designed to finance luxury properties and homes in highly competitive local real estate markets, jumbo mortgages come with unique underwriting requirements and tax implications.
K-Deal – Freddie Mac program that securitizes mortgages for apartment/multifamily residence loans, most of which are associated with affordable rental properties. Freddie Mac utilizes the following process for securitization. The multifamily loan is sold to a third-party investor, who then places the loan in a third-party trust. The third-party trust issues private-label securities based on the loan. These securities take two forms: guaranteed senior bonds, and unguaranteed subordinate and mezzanine bonds. The unguaranteed subordinate and mezzanine bonds are offered to third-party bond investors. Freddie Mac buys the guaranteed senior bonds and securitizes them through a Freddie Mac trust. Freddie Mac publicly offers pass-through certificates backed by the guaranteed bonds – known as K-Certificates – to senior bond investors.
K-Shaped Recovery – Occurs when, following a recession, different parts of the economy recover at different rates, times or magnitudes. This is in contrast to an even, uniform recovery across sectors, industries or groups of people. A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
Last Cash Flow (LCF) – Last revenue stream paid to a bond over a given period.
Legacy Asset – Distressed investment security held by the asset management estates (AMEs) of failed corporate credit unions. Legacy assets, issued before the shift to post-Global Financial Crisis (GFC) rules, primarily consist of private-label, aka non-Agency, residential mortgage-backed securities (non-Agency RMBS); Agency mortgage-backed securities (Agency MBS); commercial mortgage-backed securities (CMBS); student loan and other asset-backed securities (ABS); and corporate bonds.
Legacy RMBS – Name for private-label, aka non-Agency, residential mortgage-backed securities (RMBS) issued before the shift to stricter post-Global Financial Crisis (GFC) guidelines. RMBS issued post-GFC are referred to as “RMBS 2.0.”
Leverage – Investment strategy of using borrowed money – specifically, the use of various financial instruments or borrowed capital – to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.
Leverage Ratio – Any one of several financial measurements that look at how much of a company’s capital comes in the form of debt (loans) or assesses the ability of a company to meet its financial obligations.
Leveraged Buyout (LBO) – Acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.
Leveraged Commentary & Data (LCD) – A unit of S&P Global Market Intelligence, LCD provides in-depth coverage of the leveraged loan market through real-time news, analysis, commentary and proprietary loan data.
Leveraged Loan – Type of loan that is extended to companies or individuals that already have considerable amounts of debt or poor credit history. Lenders consider leveraged loans to carry a higher risk of default, and, as a result, a leveraged loan is more costly to the borrower.
Liability-Driven Investment (LDI) – Liability-driven investment (and liability-driven investing) is primarily slated toward gaining enough assets to cover all current and future liabilities. This type of investing is common when dealing with defined-benefit pension plans because the liabilities involved quite frequently climb into billions of dollars with the largest of the pension plans.
Loan-to-Deposit Ratio (LDR) – Used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period. The LDR is expressed as a percentage. If the ratio is too high, it means that the bank might not have enough liquidity to cover any unforeseen fund requirements. Conversely, if the ratio is too low, the bank might not be earning as much as it could be.
Loan-to-Value (LTV) Ratio – Assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, loan assessments with high LTV ratios are considered higher-risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate.
London Interbank Offered Rate (LIBOR) – Indicative average interest rate at which a selection of banks, known as the “panel banks,” are prepared to lend one another unsecured funds on the London money market.
London Interbank Offered Rate (LIBOR) USD 3 Month – This measurement tracks the LIBOR on a three-month basis and is measured in U.S. dollars.
Loss Given Default – Amount of money a financial institution loses when a borrower defaults on a loan, after taking into consideration any recovery, represented as a percentage of total exposure at the time of loss.
LTM – Last 12 months
Major Metros – The six major metro real estate markets as defined by Real Capital Analytics: Boston; Chicago; Washington, D.C.; Los Angeles; New York City; and San Francisco. All markets outside of the major metros are nonmajor markets.
Mark to Market (MTM) – Method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution’s or company’s current financial situation based on current market conditions. In trading and investing, certain securities, such as futures and mutual funds, are also marked to market to show the current market value of these investments.
Market Capitalization – Total U.S. dollar market value of a company’s outstanding shares of stock. Commonly referred to as “market cap,” it is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share.
Market Price – Weighted average of the prices of a fund’s portfolio holdings. While a component of the fund’s net asset value (NAV), it should not be confused with the fund’s NAV.
Mezzanine Debt – Occurs when a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments attached, often known as warrants, which increase the value of the subordinated debt and allow greater flexibility when dealing with bondholders. Mezzanine debt is frequently associated with acquisitions and buyouts, for which it may be used to prioritize new owners ahead of existing owners in case of bankruptcy.
Mezzanine Financing – Since commercial mortgage-backed security (CMBS) loans typically prohibit second mortgages, some borrowers use mezzanine financing to fill in the gap. Mezzanine financing, unlike a traditional second mortgage, is a hybrid of debt and equity that permits the lender to convert their debt into shares in the borrower’s company in the case of a loan default. Therefore, the mezzanine lender sits between the CMBS lender and equity shareholders in terms of repayment priority, and is junior to the CMBS lender’s claim on the company’s assets.
M1 Money Supply – Calculation of the money supply that is composed of physical currency and coins, demand deposits, travelers’ checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts. M1 includes the most-liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to cash.
Mortgage-Backed Securities (MBS) – Investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments.
Mortgage Bankers Association (MBA) Loan Monitoring Survey – Monthly survey that tracks in aggregate and by loan type the numbers of loans in forbearance as a percentage of servicers’ portfolios.
Mortgage Bankers Association (MBA) Weekly Applications Survey – Covers over 75 percent of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990 = 100.
Mortgage Debt-Service Coverage Ratio (DSCR) – The DSCR applies to corporate, government and personal finance. In the context of corporate finance, the DSCR is a measurement of a firm’s available cash flow to pay current debt obligations. The DSCR shows investors whether a company has enough income to pay its debts.
Mortgage Debt Yield (DY) – Return a lender would receive if it were to foreclose on the property on day one. Debt yield can be thought of as a lender’s perspective of the capitalization rate, the cash flow a property generates relative to a loan amount or lender’s basis.
Mortgage Excess Servicing – Fee based off the percentage of the monthly cash flow of mortgage-backed securities (MBS) that remains after the cash flow has been divided into a coupon and principal payment for the MBS holder.
Mortgage Servicing Rights (MSR) – Contractual agreement in which the right to service an existing mortgage is sold by the original lender to another party that specializes in the various functions involved with servicing mortgages.
M3 Money Supply – Calculation of the money supply that includes M2 as well as large deposits, institutional money market funds, short-term repurchase agreements (repo) and larger liquid assets.
M2 Money Supply – Calculation of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits. These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits.
National Association of Realtors Existing-Home Sales Report – This report tracks sales and prices of existing single-family homes for the nation overall, and gives breakdowns for the West, Midwest, South and Northeast regions of the country. These figures include condos and co-ops in addition to single-family homes.
Net Asset Value (NAV) – Net value of an entity calculated as the total value of the entity’s assets minus the total value of its liabilities. Most commonly used in the context of a mutual fund or an exchange-traded fund (ETF), the NAV represents the per share/unit price of the fund at a specific date or time.
Net International Investment Position (NIIP) – Includes overseas assets and liabilities held by a nation’s government, private sector and citizens. The NIIP is analogous to net foreign assets (NFA), which determine whether a country is a creditor or debtor nation by measuring the difference in its external assets and liabilities.
Net Margin – Measures how much net income or profit is generated as a percentage of revenue.
Net Operating Income (NOI) – Calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses.
New Economy – Buzzword to describe new high-growth industries that are on the cutting edge of technology and are believed to be the driving force of economic growth and productivity. A “new economy” was first declared in the late 1990s as high-tech tools, particularly the Internet and increasingly powerful computers, made their way into the consumer and business marketplace, marking a shift from a manufacturing- and commodity-based economy.
Non-Agency Commercial Mortgage-Backed Securities (CMBS) – Debt-based securities (similar to bonds), backed by the interest paid on loans for commercial properties. “Non-Agency” refers to CMBS not issued by the government-sponsored enterprises.
Non-Agency Mortgage-Backed Securities (MBS) – MBS whose principal and interest are not guaranteed by a U.S. government agency such as Fannie Mae (FNMA) or Freddie Mac (FHLMC).
Non-Agency Residential Mortgage-Backed Securities (RMBS) – Debt-based securities (similar to bonds), backed by the interest paid on loans for residences. The interest on loans such as mortgages, home-equity loans and subprime mortgages is considered to be something with a comparatively low rate of default and a comparatively high rate of interest, since there is a high demand for the ownership of a personal or family residence. “Non-Agency” refers to RMBS not issued by the government-sponsored enterprises.
Non-Performing Loan (NPL) – Loan in which the borrower is in default due to the fact that they have not made the scheduled payments for a specified period. Although the exact elements of non-performing status can vary depending on the specific loan’s terms, “no payment” is usually defined as zero payments of either principal or interest.
Non-Qualified Mortgage (Non-QM) – Any home loan that doesn’t comply with the Consumer Financial Protection Bureau’s existing rules on qualified mortgages (QMs). Usually this type of alternative mortgage loan accommodates people who are not able to prove they are capable of making the mortgage payments. Just because it is a non-QM mortgage loan does not necessarily mean high risk or subprime mortgage risk, and in many cases these non-QM mortgage loans require a high FICO score but simply do not check all the boxes associated with a QM loan. Non-QM loans for mortgages are protected by the lender against any type of lawsuit should the borrower become unable to afford the loan.
Nonrecourse Debt – Type of loan secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. The borrower does not have personal liability for the loan.
Off Balance Sheet (OBS) – “Off-balance-sheet (OBS) items” is a term for assets or liabilities that do not appear on a company’s balance sheet. Although not recorded on the balance sheet, they are still assets and liabilities of the company. Off-balance-sheet items are typically those not owned by or are a direct obligation of the company. For example, when loans are securitized and sold off as investments, the secured debt is often kept off the bank’s books.
On the Run – Most recently issued bonds or notes of a particular maturity. For example, “on-the-run” U.S. Treasuries are the opposite of “off-the-run” Treasuries, which refer to Treasuries issued before the most recent issue and are still outstanding.
Operating Cash Flow (OCF) – Measure of the amount of cash generated by a company’s normal business operations. OCF indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise, it might require external financing for capital expansion.
Option-Adjusted Spread (OAS) – Measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option. Typically, an analyst uses U.S. Treasury yields for the risk-free rate. The spread is added to the fixed-income security price to make the risk-free bond price the same as the bond.
Other Expense – Expense that does not relate to a company’s main business. In addition to operating costs, the company needs to consider other expenses, including interest expense and losses from disposing of fixed assets.
Out of the Money (OTM) – Expression used to describe an option contract that only contains extrinsic value. These options will have a delta of less than 50.0. An OTM call option will have a strike price that is higher than the market price of the underlying asset. Alternatively, an OTM put option has a strike price that is lower than the market price of the underlying asset.
Overcollateralization (OC) – Provision of collateral that is worth more than enough to cover potential losses in cases of default.
Overnight Reverse Repurchase Agreement Facility – Facility through which the Federal Reserve accepts overnight cash investments from banks, government-sponsored enterprises (the housing agencies plus the Federal Home Loan Banks) and money market mutual funds and provides U.S. Treasury securities as collateral. A reverse repurchase agreement is a transaction where one party (a housing agency, say) purchases a security from another (the Fed) with an agreement that the second party will repurchase it the following day, usually at a slightly higher price in order to provide interest to the cash provider. The facility was created in 2013 as a tool to ensure that the Fed could lift the effective federal funds rate, the interest rate the Fed targets to conduct monetary policy, above zero when it decides it is appropriate to do so.
Owners’ Equivalent Rent (OER) – Component metric used in the Consumer Price Index for the amount of rent that would have to be paid in order to substitute a currently owned house as a rental property. This value is also referred to as “rental equivalent.” In other words, OER figures the amount of monthly rent that would be equivalent to the monthly expenses of owning a property (e.g., mortgage, taxes, etc.).
Par – Short for “par value,” par can refer to bonds, preferred stock, common stock or currencies, with different meanings depending on the context. Par most commonly refers to bonds, in which case, it means the face value, or value at which the bond will be redeemed at maturity.
Pass-Through Security – Pool of fixed income securities backed by a package of assets. A servicing intermediary collects the monthly payments from issuers and, after deducting a fee, remits or passes them through to the holders of the pass-through security (that is, people or entities who have invested in it).
Payment Option Adjustable-Rate Mortgage (ARM) – Monthly adjusting ARM that allows the borrower to choose between several monthly payment options. The minimum payment option is calculated based on an initial temporary start interest rate. While this temporary start interest rate is in effect, this is the only payment option available. It is a fully amortizing payment. After the temporary start interest rate expires, the minimum payment amount remains a monthly payment option; however, whenever a payment is made that is less than the scheduled interest-only payment, deferred interest is created. Payment option ARMs have a great deal of payment-shock risk.
Pennant – Type of continuation pattern formed when there is a large movement in a security, known as “the flagpole,” followed by a consolidation period with converging trend lines – “the pennant” – followed by a breakout movement in the same direction as the initial large movement, which represents the second half of the flagpole.
Pool Factor – Current balance of loans remaining in the collateral pool of an asset-backed security (ABS) divided by the original balance of the collateral pool.
Price/Earnings-to-Growth (PEG) Ratio – A stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock’s value while also factoring in the company’s expected earnings growth, and it is thought to provide a more complete picture than the more standard P/E ratio.
Price-to-Book (P/B) Ratio – Used by companies to compare a firm’s market capitalization to its book value. It’s calculated by dividing the company’s stock price per share by its book value per share (BVPS). An asset’s book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation.
Price-to-Earnings (P/E) Ratio – This ratio for valuing a company measures current share price relative to earnings per share (EPS). The P/E ratio is also sometimes known as the “price multiple” or the “earnings multiple.” A high P/E ratio could mean that a company’s stock is overvalued, or investors are expecting high growth rates in the future.
Price-to-Sales (P/S) Ratio – Valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value that financial markets have placed on each dollar of a company’s sales or revenues. The P/S ratio can be calculated either by dividing the company’s market capitalization by its total sales over a designated period (usually 12 months) or on a per-share basis by dividing the stock price by sales per share. The P/S ratio is also known as a “sales multiple” or “revenue multiple.”
Prime – Classification of borrowers, rates or holdings in the lending market that are considered to be of high quality. This classification often refers to loans made to high-quality “prime” borrowers that are offered “prime” or relatively low interest rates.
Print-and-Sprint CLO Deal – Technique where, to allow quicker execution, a collateralized loan obligation (CLO) is priced first, and the manager attempts to buy collateral at a lower price. The strategy takes advantage of the lower funding cost of the underlying collateral and allows the manager to gauge market interest, though managers do open themselves to high exposure to the loan price, where they could be negatively impacted in instances in which the loan price rallies before the CLO is put together.
Private Investment in Public Equity (PIPE) – Selling shares of a public company in a private arrangement with a select investor or group of investors. A special purpose acquisition company (SPAC) can seek a PIPE deal if it needs to raise additional capital to close a merger transaction with a target company. A PIPE deal might become necessary when the cost of acquiring a target company exceeds the funds that a SPAC has in its trust account.
Private Label – Refers to debt-issued securities that are not issued by the government-sponsored enterprises (GSEs). “Agency” refers to debt-issued securities that are issued by the GSEs.
Pro Forma (PF) Leverage Ratio – Ratio of total indebtedness as of such date to adjusted consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) for the period of the most-recent four consecutive fiscal quarters of the borrower.
Public-Private Partnership (PPP) – Collaboration between a government agency and a private-sector company that can be used to finance, build, and operate projects, such as public transportation networks, parks and convention centers. Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place.
Purchasing Power Parity – Economic theory that compares different countries’ currencies through a basket-of-goods approach. According to this concept, two currencies are in equilibrium – known as the currencies being at par – when a basket of goods is priced the same in both countries taking into account exchange rates.
Qualified Mortgage (QM) – Mortgage that meets certain requirements for lender protection and secondary market trading under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Quantitative Easing (QE) – A monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base.
Quantitative Tightening (QT) – Reverse of quantitative easing (QE); a central bank that acquired financial assets under QE undertakes steps to reduce its balance sheet.
R-Squared – Statistical measure that represents the proportion of the variance for a dependent variable that’s explained by an independent variable in a regression model. Whereas correlation explains the strength of the relationship between an independent and a dependent variable, R-squared explains the extent to which the variance of one variable explains the variance of the second variable. So, if the R-squared of a model is 0.50, then approximately half of the observed variation can be explained by the model’s inputs.
Real Assets – Physical assets that have an intrinsic worth due to their substance and properties, including precious metals, commodities, real estate, land, equipment and natural resources.
Real Estate Investment Trust – Security that sells like a stock and invests in real estate directly through properties or mortgages.
Real Estate Owned (REO) – Property owned by a lender, such as a bank, that has not been successfully sold at a foreclosure auction. A lender – often a bank or quasi-governmental entity such as Fannie Mae or Freddie Mac – takes ownership of a foreclosed property when it fails to sell at the amount sought to cover the loan.
Real GDP – Inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year (expressed in base-year prices) and is often referred to as “constant-price GDP,” “inflation-corrected GDP” or “constant-dollar GDP.”
Real Money – Term used in the financial markets to denote a fully funded, long-only traditional asset manager. Real money managers are often referred to as “institutional investors.” The term “real money” means the money is managed on an unlevered basis. This contrasts with hedge funds, which often manage money using borrowed funds or leverage.
Relative Strength Index – A momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.
Re-Performing Loan (RPL) – A mortgage that became delinquent because the borrower was behind on payments by at least 90 days, but it is “performing” again because the borrower has resumed making payments.
Research and Development (R&D) Expense – Associated directly with the research and development of a company’s goods or services and any intellectual property generated in the process. A company generally incurs R&D expenses in the process of finding and creating products or services.
Reset Collateralized Loan Obligation (CLO) – In a reset, the entire CLO is essentially called and reissued at current market spreads, complete with new terms. While the original special purpose vehicle is retained, the reinvestment period end date and deal maturity date are both extended.
Residential Transition Loan (RTL) – High-rate, high-fee, short-term loan taken out in the form of a mortgage against an existing mortgage loan with the already mortgaged property as collateral.
Return on Assets (ROA) – Indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor or analyst an idea how efficient a company’s management is at using its assets to generate earnings. ROA is displayed as a percentage.
Revenue Per Available Room (RevPAR) – Metric used in the hospitality industry to measure hotel performance. The measurement is calculated by multiplying a hotel’s average daily room rate by its occupancy rate. RevPAR is also calculated by dividing a hotel’s total room revenue by the total number of available rooms in the period being measured.
Rising Star – Bonds that were considered speculation grade when issued but have since improved their financials, reducing the risk of default. These bonds are now closer to the security of an investment grade bond. So while rising stars are still junk bonds, there’s a chance they will not always remain junk bonds.
Risk-Free Rate of Return – The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.
RMBS 2.0 – Name for private-label, aka non-Agency, residential mortgage-backed securities (RMBS) created under revised guidelines after the Global Financial Crisis (GFC). Non-Agency RMBS dating to before this shift are known as “legacy” non-Agency RMBS.
Roll Yield – Difference between the profit or loss of a futures contract and the change in the spot price of the underlying asset of that futures contract.
S&P 500 Market Cap-to-GDP Ratio – Gauges the market capitalization of the members of the S&P 500 Index to U.S. gross domestic product.
S&P Global Market Intelligence – Provider of multi-asset class and real-time data, research, news and analytics to institutional investors, investment and commercial banks, investment advisers and wealth managers, corporations and universities.
Seasoning – Refers to the amount of time that has passed since a debt security has been issued and available to be publicly traded. Seasoning helps determine if a premium or discount should be made for the bond in the secondary market. A debt security will often be called “unseasoned” if it has been traded for less than a year or “seasoned” if it has been traded for over a year with a good repayment track record.
Secured Overnight Financing Rate (SOFR) – Benchmark interest rate for U.S. dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR). Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020. This transition is expected to increase long-term liquidity but also result in substantial short-term trading volatility in derivatives.
Selling, General and Administrative (SG&A) Expense – Category of “selling, general and administrative expense” in a company’s income statement includes all general and administrative expenses as well as the direct and indirect selling expenses of the business.
Severity – Percentage of a loan that is not recovered during a liquidation.
Sharpe Ratio – Used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Volatility is a measure of the price fluctuations of an asset or portfolio. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. The risk-free rate of return is the return on an investment with zero risk, meaning it’s the return investors could expect for taking no risk. The yield for a U.S. Treasury bond, for example, could be used as the risk-free rate.
Sigma – Statistical measurement of variability, showing how much variation exists from a statistical average. Sigma measures how far an observed data deviates from the mean or average; investors use standard deviation to gauge expected volatility, which is known as historical volatility.
Single Asset, Single Borrower (SASB) – Refers to when a lender takes a very large property and securitizes it into a single commercial mortgage-backed security (CMBS). SASB transactions can also involve the security of a portfolio of properties owned by the same or a related group of borrowers.
Small-Balance Commercial Loan – Loan that is offered on all types of commercial property. Higher-balance commercial loans can have rigorous underwriting requirements while small-balance commercial mortgages are relatively easy to get closed due to a streamlined underwriting process. Along with less-strict requirements, lenders can offer commercial borrowers a greater selection of products and packages with more flexibility.
Smart Beta – The goal of smart beta is to obtain alpha, lower risk or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing. It seeks the best construction of an optimally diversified portfolio. In effect, smart beta is a combination of efficient-market hypothesis and value investing. The smart beta investment approach applies to popular asset classes such as equities, fixed income, commodities and multi-asset classes.
Soft Landing – In reference to the economy, a soft landing refers to a slowdown in growth that avoids a recession. Central banks aim for a soft landing when they hike interest rates to cool off an economy and curb inflation without triggering a major reduction in growth.
Spread – Difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings or risk.
Spread to Maturity (STM) – Measure of return from a floating-rate note relative to that from its index or reference rate, such as the Secured Overnight Financing Rate (SOFR), calculated by discounting future cash flows on a bond basis.
Stagflation – Period characterized by slow economic growth and relatively high unemployment – or economic stagnation –which is at the same time accompanied by rising prices (i.e., inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).
Standard Deviation – Measure of the variation or dispersion of a set of data from its mean or expected/budgeted value. A low standard deviation indicates that the data points tend to be very close to the mean, whereas a high standard deviation indicates that the data is spread out over a large range of values. A measure of an investment’s volatility.
Statutory Liquidity Ratio (SLR) – Minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers.
Structured Agency Credit Risk (STACR) – Notes issued by a bankruptcy remote trust that is treated as a real estate mortgage investment conduit, a proven framework for structured credit securities. STACR reference pools are primarily made up of recently originated single-family mortgages purchased by Freddie Mac. All loans in STACR transactions undergo a rigid credit risk transfer eligibility process in addition to Freddie Mac’s risk management framework for the life cycle of the loan. Pricing is paid based on tranche spread plus the 30-day compounded average secured overnight financing rate.
Subprime – Below-average credit classification of borrowers with a tarnished or limited credit history, and which are subject to higher than average interest rates. Subprime loans carry more credit risk and, as such, will carry higher interest rates.
Summary of Economic Projections (SEP) – Four times a year, the Federal Reserve releases a summary of Federal Open Market Committee (FOMC) participants’ projections for gross domestic product (GDP) growth, the unemployment rate, inflation and the appropriate policy interest rate. The summary also provides information regarding policymakers’ views on the uncertainty and risks attending the outlook. The projections provide information on the values that participants view as the most likely to prevail in the current year and the subsequent two years as well as over the longer run. The FOMC chair presents information about these projections in the press conference following the FOMC meeting for which they were prepared.
Supercore Inflation – Inflation metric used by the Federal Reserve that tracks services inflation in the Personal Consumption Expenditures (PCE) Price Index while excluding housing and energy costs. It functions as an even narrower gauge than core PCE inflation, which excludes seasonally volatile components such as food and energy.
Supplemental Leverage Ratio – Measures a bank’s tier 1 capital (the regulatory core measure of a bank’s strength) relative to its total leverage exposure, which includes on-balance-sheet assets (including U.S. Treasuries and deposits at Federal Reserve banks) and certain off-balance-sheet exposures.
Swaption Volatility – A measure of the market price of swaptions, which are options on interest rate swaps. A call swaption, also known as a receiver, gives the holder the right, but not the obligation, to enter into an interest rate swap paying a floating rate while receiving a fixed rate. A put swaption, also known as a payer, gives the holder the right, but not the obligation, to enter into an interest rate swap paying a fixed rate while receiving a floating rate. Dollar prices on these swaptions are converted into a volatility measure, which can be used as a market gauge on expected interest-rate volatility.
System Open Market Account (SOMA) – Managed by the Federal Reserve and containing assets acquired through operations in the open market. The assets in the SOMA serve as a management tool for the Fed’s assets; a store of liquidity to be used in an emergency event where the need for liquidity arises; and as collateral for the liabilities on the Fed’s balance sheet, such as U.S. dollars in circulation.
Taper Tantrum – The 2013 surge in U.S. Treasury yields as a result of the Federal Reserve’s announcement that it would be reducing the pace of its purchases of Treasury bonds, thus, reducing the amount of money it was feeding into the economy. The ensuing rise in bond yields in reaction to the announcement was referred to as the “Taper Tantrum” in financial media.
Tapering – Gradual slowing of the pace of the Federal Reserve’s large-scale asset purchases that were put in place as part of the Fed’s quantitative easing (QE) policies.
Tenor – Length of time remaining before a financial contract expires. It is sometimes used interchangeably with the term maturity, although the terms have distinct meanings. Tenor is used in relation to bank loans, insurance contracts and derivative products.
Term Asset-Backed Securities Loan Facility (TALF) – Program created by the U.S. Federal Reserve in November 2008 to boost consumer spending in order to help jumpstart the economy. TALF did this by issuing loans to banks using asset-backed securities (ABS) as collateral. A new version of the program, TALF 2.0, was started in 2020 to purchase ABS during the economic disruption of the COVID-19 crisis.
30-Day SEC Yield – Standard yield calculation developed by the U.S. Securities and Exchange Commission (SEC) that allows for fairer comparisons of bond funds. It is based on the most-recent 30-day period covered by the fund’s filings with the SEC. The yield figure reflects the fund’s dividends and interest earned during the period after the deduction of the fund’s expenses. It is also referred to as the “standardized yield.”
Total Return – Actual rate of return of an investment or pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given evaluation period.
Tracking Error – Divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. This is often in the context of a hedge fund, mutual fund or exchange-traded fund (ETF) that did not work as effectively as intended, creating an unexpected profit or loss.
Trade Reporting and Compliance Engine (TRACE) – Financial Industry Regulatory Authority (FINRA)-developed vehicle that facilitates the mandatory reporting of over-the-counter secondary market transactions in eligible fixed-income securities.
Treasury General Account (TGA) – General checking account that the U.S. Treasury Department uses and from which the federal government makes all of its official payments. The Federal Reserve Bank of New York holds the TGA.
Treasury Inflation-Protected Securities (TIPS) – Type of Treasury security issued by the U.S. government that is indexed to inflation in order to protect investors from a decline in the purchasing power of their money. As inflation rises, TIPS adjust in price to maintain their real value.
Trepp CMBS Delinquency Rate – Monthly report published by Trepp giving the total principal balances of loans with delinquencies divided by the total principal balance of all loans.
Trepp CMBS Special Servicing Rate – Monthly report published by Trepp tracking commercial mortgage-backed securities (CMBS) loans that have gone into special servicing. The report breaks out numbers by property type and CMBS type.
Trimmed Mean PCE Inflation Rate – Alternative measure of core inflation in the Personal Consumption Expenditures (PCE) Price Index. The data series is calculated by the Federal Reserve Bank of Dallas using data from the Bureau of Economic Analysis. Calculating the trimmed mean PCE inflation rate for a given month involves looking at the price changes for each of the individual components of the PCE. The individual price changes are sorted in ascending order from “fell the most” to “rose the most,” and a certain fraction of the most extreme observations at both ends of the spectrum are thrown out or trimmed. The inflation rate is then calculated as a weighted average of the remaining components. The resulting inflation measure has been shown to outperform the more conventional “excluding food and energy” measure as a gauge of core inflation.
Triple Top – Type of chart pattern used in technical analysis to predict the reversal in the movement of an asset’s price. Consisting of three peaks, a triple top signals that the asset might no longer be rallying, and that lower prices might be on the way.
TTM – Trailing 12 months
2s10s – Shorthand term used in tracking the spread between the two-year U.S. Treasury note (2s) and the 10-year Treasury bond (10s). The inversion of the yields, when the two-year is higher than the 10-year, is seen by some economists as an indicator of impending recession.
U-6 Unemployment Rate – Rate that includes discouraged workers who have quit looking for a job and part-time workers who are seeking full-time employment. The U-6 rate is considered by many economists to be the most revealing measure of a country’s unemployment situation since it covers the percentage of the labor force that is unemployed, underemployed and discouraged.
U-3 Unemployment Rate – Officially recognized rate of unemployment, compiled and released monthly by the U.S. Bureau of Labor Statistics, measuring the number of unemployed people as a percentage of the labor force.
Uniform Mortgage-Backed Securities (UMBS) – Single-class securities backed by mortgage loans purchased by either Freddie Mac or Fannie Mae.
Unsecured Loan – Loan that doesn’t require collateral such as student loans, credit cards and personal loans. Lenders approve unsecured loans based on a borrower’s creditworthiness as opposed to relying on a borrower’s assets for security.
Up Capture – Statistical measure (also known as “up-market capture ratio”) of an investment manager’s overall performance in up markets. It is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen. The ratio is calculated by dividing the manager’s returns by the returns of the index during the down market and multiplying that factor by 100.
Upgrade-to-Downgrade Ratio – A ratio between bond upgrades (when a rating agency raises a bond’s rating) and bond downgrades (when a rating agency lowers a bond’s rating).
U.S. Treasuries (UST) – Commonly used for references to the Treasury debt that the U.S. issues.
USD/JPY – The currency pair USD/JPY is the shortened term for the U.S. dollar and yen pair or cross for the currencies of the United States and Japan. The currency pair indicates how many Japanese yen (the quote currency) are needed to purchase one dollar (the base currency).
Value Stock – Shares of a company that appear to trade at a lower price relative to its fundamentals, such as dividends, earnings or sales, making it appealing to value investors.
Value Trap – Stock or other investment that appears to be cheaply priced because it has been trading at low valuation metrics, such as multiples in terms of price to earnings (P/E), price to cash flow (P/CF) or price to book value (P/B) for an extended time period. A value trap can attract investors who are looking for a bargain because they seem inexpensive relative to historical valuation multiples of the stock or relative to those of industry peers or the prevailing market multiple. The danger of a value trap presents itself when the stock continues to languish or drop further after an investor buys into the company.
Volatility – Statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.
Voluntary Prepayment Rate (VPR) – Measure of loan prepayments (excluding losses) within a collateral pool over a period of time.
Weighted Average Cost of Capital (WACC) – Calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common and preferred stock, bonds and any other long-term debt, are included in a WACC calculation.
Weighted Average Coupon (WAC) – Measurement of the rate of return on a pool of mortgages that is sold to investors as a mortgage-backed security (MBS). The WAC is the average gross interest rate of the underlying mortgages in an MBS at the time it was issued.
Weighted Average Life (WAL) – Average number of years for which each dollar of unpaid principal on a loan, mortgage or bond remains outstanding.
Weighted Average Loan Age (WALA) – Measures the average age of the loans in a pool of mortgage-backed securities (MBS). The weights are based on the dollar amount of each loan at each maturity in proportion to the aggregate total of the pool and can be weighted on the remaining principal balance dollar figure or the nominal value of the loan.
Weighted Average Loan-to-Value Ratio Amortized (WA LTV) – Ratio of a property’s original appraised value (at issuance) to the current mortgage amount outstanding. LTV ratios are weighted by their current balance.
Weighted Average Maturity (WAM) – Current weighted average of the remaining time to maturity (measured in months) of the loans/pools backing a security.
Weighted Average Rating Factor (WARF) – Used by credit rating companies to indicate the credit quality of a portfolio. This measure aggregates the credit ratings of a portfolio’s assets into a single rating.
Weighted Average Spread (WAS) – Par-weighted average spread (generally above LIBOR) of the performing floating-rate securities in a portfolio (typically loans).
West Texas Intermediate (WTI) Crude Oil– Specific grade of crude oil and one of the main three benchmarks, along with Brent and Dubai Crude, in oil pricing. WTI is known as a light sweet oil because it contains 0.24% sulfur, making it “sweet,” and has a low density, making it “light.” It is the underlying commodity of the New York Mercantile Exchange’s (NYMEX) oil futures contract and is considered a high-quality oil that is easily refined.
Whole Business Securitization (WBS) – Transaction in which an issuance of notes is secured by a pool of income-generating assets (other than financial assets such as loans or receivables) that make up substantially all the revenues of a business.
Whole Loan – Single loan issued to a borrower. Lenders of whole loans often sell them in the secondary market to institutional portfolio managers and agencies, such as Freddie Mac and Fannie Mae. Lenders sell their whole loans to reduce their risk. Rather than keep a loan on their books for 15 or 30 years, the lender can recoup the principal back almost immediately by selling the whole loan to an institutional buyer.
Wu-Xia Shadow Federal Funds Rate – Shadow rate model, by economists Jing Cynthia Wu and Fan Dora Xia, to characterize the term structure of interest rates that is not bounded below by zero percent.
Yield Curve – A line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main types of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve) and flat.
Yield to Duration (YTD) – The yield of a bond if you were to buy and hold it until the time at which the price of the bond can be repaid by its internal cash flows.
Yield to Maturity (YTM) – The total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but is expressed as an annual rate.
Yield to Worst (YTW) – The lowest yield of a bond that can be received short of default.
Z-Score – Numerical measurement used in statistics of a value’s relationship to the mean (average) of a group of values, measured in terms of standard deviations from the mean. If a Z-score is 0, it indicates that the data point’s score is identical to the mean score. A Z-score of 1.0 would indicate a value that is one standard deviation from the mean. Z-scores might be positive or negative, with a positive value indicating the score is above the mean and a negative score indicating the score is below the mean.
Zero-Volatility Spread (Z-Spread) – Constant spread that makes the price of a security equal to the present value of its cash flows when added to the yield at each point on the spot rate U.S. Treasury curve where cash flow is received. In other words, each cash flow is discounted at the appropriate Treasury spot rate plus the Z-spread. The Z-spread is also known as a “static spread.”
Zumper National Rent Report – Monthly survey tracking the median rents for one- and two-bedroom apartments in the 100 most populous U.S. cities.
